I am bullish on Coinbase Global (COIN) because its revenues are growing, and the crypto market is here to stay. Coinbase is well-positioned to take advantage of the crypto market’s growth. (See Analysts’ Top Stocks on TipRanks)
Overview
Coinbase is a financial infrastructure and technology provider for the crypto economy. Essentially, it is a brokerage service for investors to invest in crypto coins and will soon offer Non-Fungible Tokens (NFTs).
Future Outlook
Coinbase’s revenue is tied very closely to trading volume. As the crypto market grows, the company will benefit from more trading activity. Coinbase is one of the most recognizable companies in the crypto space. As new retail investors flooded the crypto market, Coinbase grew its earnings by over 7,300% in the past year. This growth rate will slow, and earnings could decline slightly in the following year. Even with a decline, investing in Coinbase is an investment into the crypto-economy.
The global cryptocurrency market was valued at $1.49 billion in 2020 and is projected to reach $4.94 billion by 2030. This equates to a compound annual growth rate of 12.8% from 2021 to 2030. With the crypto market growing, Coinbase is positioned to take advantage of these industry tailwinds.
With the recent growth, the company has amassed a large cash position. The cash adds fuel to the fire and gives Coinbase access to more opportunities. The crypto market has very little support in terms of transactional value on a global scale. As infrastructure develops, Coinbase is positioned to benefit from its technology stack and financial position. Future partnerships and acquisitions will likely fuel the company’s revenue growth. This will result in faster growth than the crypto market as a whole.
Company Financials
The company has a very healthy balance sheet with enough short-term assets to cover its short and long-term liabilities combined. Coinbase’s interest on its debt is well covered by EBIT (513.9x coverage), and its debt is well covered by operating cash flow with 258.5% coverage.
Its twelve-month trailing Free cash flow skyrocketed in the past year. It grew from $584.6 million in September 2020 to $9.891 billion in September 2021. The company’s cash position has also grown due to the increase in revenues and the $3.9 billion in debt it issued in the last year and a half.
Valuation
Free cash flow is projected to decline over the following years because it will deploy cash into research and development. The discounted cash flow calculation will use $3.52 billion as a starting figure.
With the overall crypto market growing at around 12% annually and Coinbase’s cash-rich balance sheet, the calculation assumes the company increases its market share and cash flows will grow at 16.7% annually. The discount rate is the company’s weighted average cost of capital at 7.47%.
Starting with $3.52 billion in free cash flow and growing by 16.7% annually with a discount rate of 7.47%, Coinbase’s present value of future cash flows is $56.943 billion. This valuation gives the company a stock price target of $366.80.
Risks
The risks involved in an investment in Coinbase include threats to the crypto market as a whole. The price of Coinbase is largely impacted by the transaction volume of cryptocurrencies and the popularity of the crypto market. If regulation or another external factor hinders the crypto market or the transaction side of the market, Coinbase could be negatively impacted.
Approximately 90% of Coinbase’s revenue derives from transaction charges based on a percent of the transaction. If the market continues to grow and investors’ sentiment improves, more money would flow into crypto assets. This improving sentiment would increase the transaction volume as well as transaction size and improve top-line growth.
The opposite, however, remains true. If the industry plummets due to externalities such as regulation, Coinbase could be crippled by the lack of transaction size and volume.
Analyst Consensus
Turning to Wall Street, Coinbase has a Strong Buy consensus rating, based on 13 Buys, two Holds, and one Sell assigned in the last three months. At $398.00, the average Coinbase price target implies 37.3% upside potential.
Final Thoughts
Coinbase is a large competitor in a quickly growing market. With its user-friendly interface and solid financial standing, the company has a bright future. It is well-positioned to profit as the crypto market grows and demand increases for more technology services in the crypto infrastructure. Look for future advancements as the company invests further into its technology and possible acquisition opportunities.
Disclosure: At the time of publication, Aaron Stine did not have a position in any of the securities mentioned in this article.
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